Hyper-Inflation is Coming; Cash will be Very Poor Place to Hide

We are going to see a period of hyperinflation very soon. The only way that the government can finance a deficit which is 80% of GDP is to erode the value of the dollar. How do you protect yourself?

The reality as has been learned countries like Argentina and Russia over the last two decades is that you cannot easily protect yourself in a hyperinflationary environment.

In the coming sustained hyperinflationary period, cash accounts will quickly convert to higher yields, as will money market funds.  However, these will prove to be very poor places to park your money as the tax consequences (essentially immediate taxation of gains) will immediately erode the appreciation and the value of your savings will not be sustained.  CDs will be even worse as you would be making a dramatic mistake to lock in to rates that may not be competitive as inflation creaps higher and you will suffer these same tax consequences. 

Many investors believe that the safest bet is to pile into gold.  After seeing the CEO of Barrick Gold on CNBC several weeks ago, I am convinced that this is not the place to hide.  Gold has seen a dramatic increase in price, almost 4-fold, over the last five years.  Its inherent value is tied principally to jewelry and its historical record as a hedge against inflation is dubious at best.

Other commodities may serve as better bets against inflation.  Each commodity, however, will ultimately be tied to its underlying demand.  I particularly like oil as I believe that demand is not going away any time soon.

I bonds are terribly poor because they are rear facing.  It will become clear that these things are a scam when they are reset from zero to a very low rate on November 1, 2009.  These bonds are reset based on CPI-U which is always rear-facing.  Other floating rate, inflation-indexed bonds, such as TIPS, may perform better but are probably not going to maintain the purchasing power of the money invested.

Some foreign currencies may offer some protection.  I'd look to those that are backed by hard commodities for diversification.  The British pound and Aussie dollar come to mind, but these countries also face dramatic fiscal challenges.

When it comes down to it, your best hedge is going to be equities.  These will appreciate dramatically as earnings grow in a hyper-inflationary environment. But, equities have real risk, as anyone who has been near the market over the last ten years can attest.

The even better bet will be real estate, but real estate values are still falling and falling dramatically.

The reality, though, is that hyperinflation is going to be very turbulent and will have dramatic consequences.   It is going to quickly erode the value of your savings, leaving many with the feeling that they need to purchase something as soon as they have a dollar in their pocket.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to bank transparency and the climate crisis. Since co-founding this website in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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